Economic Recession Looms while the Civil Service Booms

No big surpise here, when government’s go on uncontrolled spending sprees, the only one who benefits are those who work for and in government:

The highest-paid federal employees are doing best of all on salary increases. Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available.

When the recession started, the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.

The trend to six-figure salaries is occurring throughout the federal government, in agencies big and small, high-tech and low-tech. The primary cause: substantial pay raises and new salary rules.

What are the odds the same result isn’t occurring in Canada?

The Minimum Wage and Unemployment: Tyranny of Good Intentions

The United States’ unemployment rate hit a 26 year high in August, reaching 9.7%.  The teenage unemployment rate hit 25.5% – meaning that one in four teens who wanted to work were unable to find jobs – the highest rate since they started keeping track of it over half a century ago.  The easy explanation for this is that America is in “The Great Recession” and there just aren’t jobs out there.  However, there is another factor at play.  The U.S. increased their minimum wage from $5.15 per hour to $7.25 per hour… and it took effect at the end of July.

Raising the minimum wage is a feel-good policy that tends to have good traction with the populace.  Very few of us actively root against people earning more money, especially those people who are at the bottom rung of the employment ladder.  Unfortunately, good intentions will pay no bills, pay no rent and put food on no one’s table.  Increases in the minimum wage have a net detrimental effect on the wealth and well being of society.

It has long been understood by economists that an increase in the minimum wage will result in lower employment.  And really, this just makes sense; if the price of a good goes up, people will tend to purchase less of it.  The same holds true labour.  The question has always been, do the benefits of raising the minimum wage outweigh the costs in terms of unemployment?  Recent research has determined that it likely depends on what the current and proposed levels of the minimum wage are in order to determine what the effects will be.  Research tells us that if the minimum wage is less than 41% of the average wage, the effect on employment will be relatively small, implying that such increases will be more good than bad.  However, just because we can measure lower costs of raising the minimum wage doesn’t mean that we have demonstrated any tremendous social utility of raising it.

Proponents of increasing the minimum wage are likely to point out that no one could support themselves or their family earning such an amount (even working full time).  This often leads to the call for the “living wage” – an amount that would allow someone to work full time at the minimum wage and purchase a certain bundle of goods that we have determined are the bare minimum of goods and services that someone needs in society (eg you can eat, but you probably don’t have a plasma screen TV).

But is there any reason to believe that minimum wage earners should be able to purchase such a bundle of goods?  To determine that, we must determine who it is that tends to earn minimum wage.  Naturally, as we’ve learned, students tend to earn minimum wage.  Students tend not to be sole supporters of themselves or their families.  In fact, only about 5% of minimum wage earners are the primary breadwinners for a household (that goes for the U.S. and Canada).  95% of these people are supplementing household income, and if they are not being relied upon for survival, risking their very employment for a relatively small gain may not be worth it.  Further, statistics tell us that 2/3 of minimum wage earners receive a raise within a year – so these people aren’t staying at the minimum wage very long.

Despite the title of this post, advocacy for a minimum wage and for increases in the minimum wage were not always altruistic.  Starting in the 1930s and proceeding for decades, the minimum wage was used as a tool to protect a favoured class of workers (often union and/or white) against another class.  It was used to benefit the low skilled at the expense of the unskilled.  In 1957, a U.S. Senator, advocating for an increase in the minimum wage, said:

Of course, having on the market a rather large source of cheap labor depresses wages outside of that group, too–the wages of the white worker who has to compete.  And when an employer can substitute a colored worker at a lower wage–and there are, as you pointed out, these hundreds of thousands looking for decent work–it affects the whole wage structure of an area, doesn’t it?

Four years later, that senator became the President.

When the minimum wage is increased, it is the work of least monetary value that will be eliminated.  The cost of minimum wage will fall disproportionately upon the young, students, minorities and the uneducated.  And because many pay structures are based upon the minimum wage, even those who do not earn the minimum wage will still have an incentive to support its increase (this might explain why unions – which generally secure wages above the minimum – support such measures).  We are, in fact, re-distributing wealth from the poorest among us when we increase the minimum wage.

Even those actors (unions, corporations) which seem to support the increase of minimum wage for pure reasons may have hidden agendas.  Retailers who offer wages higher than minimum wage will seek an increase in the minimum wage not (as unions might do) to inflate their wage structure, but to increase the costs borne by their competitors.  This is just another form of rent seeking, where a corporation looks to the government to enact unfair rules to protect the company’s market share.

Finally, the only real reason to have a minimum wage (besides any self-serving reasons by interested parties noted above), is to relieve poverty.  Unfortunately, increasing the minimum wage does little to nothing in the way of relieving poverty.  The use of a minimum wage is an inefficient and ineffective way to re-distribute wealth.  If we determine that a certain level of wealth re-distribution is desired (and most of us believe that; we just argue about the level), there are easier ways to go about it.  At the very least, it would be much more effective to just give people money.

This is not an argument in favour of eliminating the minimum wage; there are sound arguments for a minimum wage (the fear of exploitation, the fact that hardly any of us are rational actors, etc.), but, so far, there is no evidence that a highly inflated minimum wage does much good.  In fact, we know that it does ill.

Just ask some students.

Obama Motors – How Not to Run a Car Company

It looks like General Motor is back on track:

This spring, while seeking upward of $50 billion in federal assistance to shed debt and keep afloat, GM disclosed plans to import a new line of compact cars the size of a Toyota Yaris from China. That sparked an outcry from the UAW and from Congress, which put pressure on the Obama administration to persuade GM to drop the plan and build the cars in the U.S. GM, already deeply indebted to the government, agreed.

Because everyone knows Congress and the Unions know how to run a successful company.

Jim Flaherty needs Financial Literacy Task Force himself

Like, we need one more task force?!? This new Financial Literacy Task Force looks like a liberal project washed over with blue paint.

I find it rich that the federal finance minister, the grand overseer of monetary inflation, the recent corporate bailouts and the largest deficits, is now telling Canadians that they need more financial literacy. Jim Flaherty should be getting more financial literacy himself, if you ask me! Not too long ago Flaherty was trying to convince us that we believe we need more credit. What happened to that campaign? et cui bono? by the way.

If my car is not working, I go to my auto mechanic and he helps me. If my back is malfunctioning, I go to my chiropractor and he helps me too. Those guys also give me advice on what I can do on my own but in the end, they are the ones who have the specialized knowledge. In common economic parlance, we call that the division of labor. I do not need to improve my literacy on auto mechanics nor on vertebral physiology. I just need to pay them to do their work. Having confidence in their abilities to deliver service helps too.

I do not believe tax-payers are ignorant. Rather, I think they need to keep more of their own money and they need to stop financing cronyism, task forces and government nonsense. I also believe they should not be obligated to use a perpetually inflating currency but it will be a cold day in hell before any “conservative” even sees the monetary supply for what it truly is.

Instead of funding a task force, I think Jim Flaherty should focus on making life easier for financial consultants by putting an end to false economic signals. Maybe he can lead seminars called “How To Take Wild Guesses On What Sectors Of The Economy Will Get Bailouts” or “Who Gets The Cheap Credit First?” just to name a few.

Yeah, that was sarcasm. What I mean is that financial consultants, i.e. people who make a living off of precisely what the Financial Literacy Task Force is addressing, are misled by the government.

See, the problem is government intervention in the markets. The government inflated the money supply so, credit was made available to anybody. To stay competitive, the bankers and the money lenders had no choice but to ease their credit requirements. Thus, people who would ordinarily be turned down for loans, soon became eligible for mortgages. We got a housing bubble. Since printing money does not create wealth, vast sectors of the economy were given false signals of future productivity which, surprise, surprise, never materialized. Now, we have a recession while markets adjust.

As long as the government still gives people hope of bailouts and monetary inflation, the recovery will be slow. Business cycle theory is not more complicated than that.

Stimulus Isn’t Working: Obama Decides to Dig Deeper Hole

It seems President Obama isn’t willing to accept that his fiscal stimulus is a colossal failure, in fact, it’s full steam ahead for the rookie president’s Keynesian policies:

The White House acknowledged it has spent only $44 billion, or 5 percent, of the $787 billion stimulus, but that total has always been expected to rise sharply this summer.

“Now we’re in a position to really accelerate,” Obama said.

[...]

The economy has shed 1.6 million jobs since the stimulus measure was signed in February, far overshadowing White House announcements estimating the effort has saved 150,000 jobs. Public opinion of Obama’s handling of the economy has declined along with the jobs data.

For the first time, the administration admitted the economic forecasts it used to sell the stimulus were overly optimistic.

$45,000,000,000.00 / 150,000 jobs “saved” = $300,000.00 spent per job, hardly what I would call sound fiscal policy. Not to mention the stimulus contained a number of “buy American” provisions which will undoubtedly deepen the job losses:

At first glance, “Buy America” floated courtesy of billions of U.S. taxpayer dollars ostensibly to revive an economy that would create American jobs, looked like a political winner. Indeed, it may have initially looked like a godsend in what was to be a coming U.S. unemployment rate that would skyrocket to its highest level in a quarter of a century.

[..]

Now many U.S. exporters fear the provisions will backfire, costing American jobs as other countries retaliate. Some municipalities in Canada have already begun organizing boycotts of U.S. products, and EU and Canadian officials say they are reviewing their options.

Suprise Suprise, the US Fiscal Stimulus is a Failure

Dick Morris points out a sobering truth about the failure of “stimulus” economics:

Here are the details. In April, personal household, inflation-adjusted income rose by $122 billion. Of that increase, one-third or $44 billion came from the government’s stimulus program. But while personal income was rising, household savings (which includes paying down credit card balances, mortgages, student loans, car loans, etc) rose by $132 billion — $10 billion more than the rise in income. So personal consumption dropped 0.1%.

The stimulus package was a total and complete failure. As predicted, as happened with Bush’s 2008 tax cut, as happened with the Japanese stimulus packages of the 90s, fearful consumers sat on their money and wouldn’t spend it. Keynesian economics didn’t work. Again.

The economic situation in Canada is not likely to be much better.

John H. Cochrane writing at the economist.com:

There is little empirical evidence to suggest that stimulus will work either. Empirical work without a plausible mechanism is always suspect, and work here suffers desperately from the correlation problem. Quack medicine seems to work, because people take it when they are sick. We do know three things. First, countries that borrow a lot and spend a lot do not grow quickly. Second, we have had credit crunches periodically for centuries, and most have passed quickly without stimulus. Whether the long duration of the great depression was caused or helped by stimulus is still hotly debated. Third, many crises have been precipitated by too much government borrowing.

Obama’s Socialist Tendancies: Converting Preferred Stock to Common Stock

Dick Morris, a former adviser to Sen. Trent Lott (R-Miss.) and President Bill Clinton has some strong words concerning President Obama’s proposed plan to convert the stock the government owns in US financial industry from preferred stock, which it now holds, to common stock.

But to avoid the issue of a potential for government control of the banks, everybody agreed that the stock the feds would take back in return for their money would be preferred stock, not common stock. “Preferred” means that these stockholders get the first crack at dividends, but only common stockholders can actually vote on company management or policy. Now, by changing this fundamental element of the TARP plan, Obama will give Washington a voting majority among the common stockholders of these banks and other financial institutions. The almost 500 companies receiving TARP money will be, in effect, run by Washington.

And whoever controls the banks controls the credit and, therefore, the economy. That’s called socialism.

Hypocritical Congress Reward Big Bonuses to Staff in 2008

Considering the recent antics of the House Financial Services Committee, no one should really be surprised at the hypocrisy occurring in Congress over staff wages:

Total end-of-year bonuses paid to congressional staffers are tiny compared with the $165 million recently showered on executives of American International Group Inc., which is being propped up by billions of dollars of U.S. government subsidies. But Capitol Hill bonuses provide a notable counterpoint to the populist rhetoric and sound bites emanating from Washington these past weeks.

Last year alone, more than 200 House lawmakers, both Republicans and Democrats, awarded bonuses totaling $9.1 million to more than 2,000 staff members, according to a Wall Street Journal analysis of office-disbursement forms. The money comes out of taxpayer-funded office budgets, and is surplus cash that would otherwise be forfeited if not spent.

Recession will Alter the Nature of Capitalism” – You’re kidding right?

I hope Dodge was misquoted, because he should know better than anybody that the fundamentals of capitalist are not going to be altered because of a recession:

OTTAWA — Canada and the world are facing a long and deep recession that will fundamentally alter the nature of capitalism, former Bank of Canada governor David Dodge said in an exclusive interview a year after he left the bank.

Business practices and government policy may change to adapt to the realities of modern commerce, but lets not claim that capitalism is going to change to limit greed of consumers and corporations – that kind of sensationalism should be left to uneducated editorialists, not former Bank of Canada Governors.

Government Job Creation – Making You Pay More for Everything

The Ontario government’s solution to a slumping job market is to make homeowners pay for mandatory “green audits” of their homes energy:

The Ontario government is prepared to impose a green regime that will direct how homeowners sell their property, set prices on alternative energy and cut municipalities out of decision-making where wind and solar energy projects can be located.

The sweeping legislative package known as the Green Energy Act will amend 15 statutes and the government says it will create 50,000 jobs.

For homeowners already facing one of the worst markets in decades, the new law will mean they will be forced to pay for an energy audit before putting their house on the market. [Emphasis mine]

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